This article assumes that the reader is familiar with the financials and fundamentals of radiology software company ProMedicas (ASX: PME), which I have covered extensively in our ProMedicas reports over the years.
Over the past 5 years, I’ve followed a Twitter account that mostly only posts about ProMedicis shares when they’re in big declines. I’ve found that historically, if you bought shares when this happened, it would be a decent time to buy. Commentary is only a good gauge of market sentiment.
The reason I use social signals to inform my view of when shares of ProMedicine are attractive is that this is a market that has never traded at a cheap multiple in a mathematical sense, since once it enters the S&PSX 200, instead, a small level of share price appreciation is generated by a small level of high-cost software.
In recent months, the narrative has persisted that software companies face some existential threat from artificial intelligence. While there is no doubt that artificial intelligence will create winners and losers in the software industry, we are currently witnessing the general sale of nearly all software companies as a result. While I see winners and losers, the market only sees every software business lose.
ProMedicis is one that I think is unlikely to lose its top position to competitors using AI to code copycat products. In part, this is because people have been trying to duplicate, or compete with, the product for a long time already. Furthermore, even if a better product were to be produced, it would have to get FDA approval, and that could be extra complicated if the code itself wasn’t well explained by the real humans who prompted the AI to write it. Suffice it to say that this will be a very slow process, and we should be able to actually track it before it has any impact on actual revenues.
On the other hand, one of the fastest ways to actually make money with AI would be to train a model to detect certain conditions with higher accuracy than radiologists and then sell it to radiology departments through the Visage platform. If AI is so easy for AI geniuses, they should do it first to prove it. The upside to pro-medics is that they’ll get to clip the ticket to this ecosystem. You can see how they are nurturing it by investing in other companies.
Of course, one limitation many competitors face is that, unlike ProMedicis, they don’t have access to any real-world scan data to train their radiology algorithms.
In any case, you can see that the ProMedicis P/E ratio has come a long way from its peaks but is above its average over the past 10 years (data per S&P Cap).
However, if we look at the period since it was first included in the S&P ASX200, then typically, you would have done well to buy the stock at around 150x trailing earnings.
I also note that the company is currently buying back shares, and the founders recently bought close to $1 million each at over $220 a share, and the chairman bought a little over $100K per share at a similar price.
Obviously, it’s hardly a “bet the farm” style bet for any of these guys, but I think it indicates that business operations aren’t being affected by the latest big problem. My basis for this theory is that in the past, during periods where the founders personally bought shares and the company was also buying shares, it always showed that the business was very good, and the problem du jour was not a big deal.
Of course, what happened in the past is no guarantee of the future.
I’m personally motivated by finding mostly small companies that become stock market darlings like ProMedics.
I already own shares of Promedis, which have been held for many years. I’m not sure if I would buy any at current prices. But I think, If I had been sitting all these yearsalways thinking that ProMedicis is a good company, but the shares are very expensive, then I’m probably a bit nervous at the current price of around $189.
I have no way of knowing when the sentiment around this stock will bottom out. It’s not exactly cheap, but my guess is that, based on social cues, if you take a long-term view, ProMedicis shares have just entered the buy zone.
That said, ProMedics is hardly the only software stock suffering from a share price meltdown. There are other high-quality software businesses that I have my eye on as well, trading at less demanding multiples.
I’m not calling software stock a sell-down. Far from it, but I’m saying let’s sharpen our pencils and figure out which high-quality stocks we want to buy during the sell-off, and what kind of prices we’re looking for.
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Disclosure: The author of this article owns shares in PME and will not trade PME shares for at least 2 days after the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that constitute advice under law are general advice only. The author has not considered your investment objectives or personal situation. Any advice given is authorized by Claude Walker (AR 1297632), an authorized representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 276544).
The information contained in this report is not intended to be, and shall not be construed as, personal financial product advice. You should consider whether this advice is appropriate for you and your personal circumstances. Before you make a decision to acquire a particular product, you should obtain and read the relevant product disclosure statement. Nothing in this report should be construed as a solicitation or recommendation to buy or sell any financial product. A Rich Life does not guarantee or represent the information, opinions or conclusions contained in this report. Future results may differ materially from such opinions, forecasts, estimates or forward-looking statements. You should be aware that any reference to past performance does not indicate or guarantee future performance.
